Page 362 - Hydrocarbon Exploration and Production Second Edition

Petroleum Economics 349

Contractor’s
Profit Oil
Government final take
share of
profit oil Tax on
contractor’s
50% share of profit oil

Cost Oil for contractor’s
recovery of capex and opex
50%

Royalty (10%)

Figure 14.7 Split of production for a typical PSC.

negotiation between the government and the oil company. This can result in a
protracted process and require significant effort and patience on behalf of both parties.
The final agreement will, by definition, be acceptable to both parties; the government
securing a commitment to exploration, appraisal and potential development with a
reasonable government take of the revenues, and the oil company gaining a contract
with a potential return which meets internal company investment criteria.
In general, the oil company return from a PSC is lower than that of a tax and
royalty system. This is because the governments of many of the recently developed
basins have elected to set up PSCs (e.g. Algeria, Angola, Kazakhstan). In less mature
basins, with larger prospective undiscovered oil and gas targets, the government is
able to secure better terms than for a mature area, where traditionally tax and royalty
systems were established.
An advantage of PSCs is that the agreement includes a time schedule and fiscal
terms for exploration, appraisal and development, and production periods (see
Section 2.3, Chapter 2). As terms of the PSC are fixed, this reduces some of the
uncertainties associated with tax and royalty systems where the level of royalty
and tax rates may vary over the field lifetime. Figure 14.8 gives an indication of
how frequently the tax and royalty terms have changed in the UK sector of the
North Sea – such risks need to be considered when investing in what may be a
politically stable country, but has proved to be fiscally unpredictable.

14.2.2.6. Economic indicators from the cashflow
From the net cashflow and cumulative net cashflow some basic economic indicators can
be determined. The net cashflow determines the economic lifetime of the field. When